Bringing sourcing and procurement activities online can produce a number of benefits that go far beyond the savings and process improvements achieved with a click and buy application. Aggragating spend data through a central repository opens up a host of opportunities that forward-thinking organizations are taking advantage of, and slow-thinking ones are missing out on.

IT giant IBM (Armonk, N.Y.) says it can attribute more than $400 million in hard savings directly to its use of online spending tools in 2001. That does not include the soft savings gained from the improved sourcing strategies that came about from using the tools. That number is bigger but more elusive.

At IBM, tracking the value of its e-procurement tools and the benefits they bring is priority number one. Big Blue has detailed procedures to closely evaluate its IT investments and ensure those investments are continuing to provide the company with value. Not surprisingly, the evaluations are now focused on ensuring IBM's investments in its e-sourcing and e-procurement applications are pulling their weight. Bill Fanning, director of global procurement finance and planning, functions like a General Accounting Office of sorts for IBM's procurement IT investments, deciding if a certain procurement tool in development is worth its forecasted investment or if an existing tool is still bringing value.

"We measure the effectiveness of the tool on a quarterly or even monthly basis," he says. "Sometimes in IT development you think it's a great idea, you put it in place, but it costs you more money in the end. I have seen that in IBM. If something is not being utilized, we would eliminate it. If we were in a situation where one set of tools is replacing another set of tools, we would try to close the first set as quickly as possible to minimize inefficiencies in the overlap."

The majority of IBM's sourcing tools are developed internally. The cornerstone of IBM's online spend tracking is its business data warehouse (BDW to IBMers). This is the repository where all of IBM's spend data is housed and easily accessed by users. One of the biggest improvements IBM has seen since implementing this warehouse several years ago is the company's ability to adhere to its previously negotiated contracts. IBM admits that when it began its e-procurement efforts, one of the things third-party suppliers said on their surveys was that IBM was terrible in upholding its contracts. And suppliers soon realized that if they weren't getting the contracted business, their competition probably was. With spend data flowing into the BDW, changes in procurement practices can be made on the fly and individual locations can be alerted when contracts should be adhered to more closely.

"As a result of this, we have been able to uphold better relationships with suppliers," says Henry Pruitt, director of e-procurement and technology deployment. "We've also looked at doing some segmenting of suppliers. There are core suppliers we want to consolidate to and there are nonstrategic suppliers we want to move away from. For certain commodities there are some key suppliers we want to make sure we are getting the right value from." Pruitt says the core suppliers are judged not only on size and quality, but on their electronic capabilities.

Streamlined access to spend data at one of the largest corporations on the planet can come in handy during crunch times. When supply abounds, IBM adheres to its contracts, because most likely it will not be long until the tables turn and supply is limited again. And when IBM needs precious parts from a supplier on an expedited basis, it doesn't hurt to have proof of IBM's commitment to that supplier available in black and white.

Fanning says there is another benefit to the BDW that may have less impact on supplier relationships, but is very valuable internally. "We regularly will get calls from the chairman's office and he may say that he is going to see a certain customer," Fanning says. "He will ask how much business we did with that company last year. Without this BDW, we would have to call all over the company and track it down."

IBM's business is refocusing on IT services and away from hardware. The company is outsourcing the vast majority of its IT manufacturing operations to contract manufacturers (CMs). That change is impacting all procurement operations. Comparing the price and quality of a memory chip is more cut and dry than measuring the price and quality of a computer programmer. To solve this quandary, IBM developed its Web-based Technical Skills Matching application, which lets requesters select candidates from an online database, conduct interviews and submit online requisitions. The data is transferred automatically from the Skills Matching application to the requisition system and captured in reportable fields for contract measurements and evaluation. The tool has reduced the process of procuring services from weeks to under three days in most cases. Standard skill definitions and classifications are being used to reduce the number of misunderstandings and mismatches.

While the company is relying more on the services of contract manufacturers, it is still leveraging its size in buying components. Mike Meaden, director of component procurement, says IBM focuses on buying high-cost, lower volume components like semiconductors and memory chips and lets the CMs buy lower-value high-transaction parts like resistors and capacitors. Meaden estimates that IBM still buys 80% of the dollar value of its parts, but only 5% of the part numbers.

To manage the new mix, IBM developed the A-Source application, which automatically compares a costed bill of materials from a CM to an internal one from IBM. "From there, we have three alternatives," Meaden says. "One is let the CM buy themselves if we don't have an advantage. Number two is let the CM buy off our contracts at our prices because we have an advantage, but we don't need to mask the price.

The third is we buy at our price and then sell to the CM with a masked price. "The third option takes place on the Singapore Trading Exchange, an IBM-developed online exchange aimed at shortening the loop between parts supplier, IBM and CM. "We use other operational metrics to track the performance (between supplier, CM and IBM) because buying from suppliers and selling to CMs complicates the supply chain. It adds another link, which adds opportunity for missed communications, so we have operations metrics in areas such as service levels, order acceptance, and on-time delivery."

When it comes to benchmarking itself against the rest of the industry, IBM relies on its research teams to keep up to speed on what other companies are doing, as well as its customer interactions in selling IT services.